The Optimal Design of Fallible Organizations: Invariance of Optimal Decision Criterion and Uniqueness of Hierarchy and Polyarchy Structures

Winston Koh

No 18-2004, Working Papers from Singapore Management University, School of Economics

Abstract: We present a general framework to study the project selection problem in an organization of fallible decision-makers. We show that when the organizational size and the majority rule for project acceptance are optimized simultaneously, the optimal quality of decision-making, as determined by the decision criterion, is invariant, and depends only on the expertise of decision-makers. This result clarifies that the circumstances under which the decision-making quality varies with the organizational structure are situations where the organizational size or majority rule is restricted from reaching the optimal level. Moreover, in contrast to earlier findings in the literature that the hierarchy and the polyarchy are suboptimal structures, we show that when the size, structure and decision criterion are simultaneously optimized, the hierarchy and the polyarchy are in fact the only possible optimal organizational structures when decision-making costs are present.

Keywords: organizational decision-making; structure; quality; hierarchy; polyarchy (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2004-08
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Published in SMU Economics and Statistics Working Paper Series

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Journal Article: The optimal design of fallible organizations: invariance of optimal decision criterion and uniqueness of hierarchy and polyarchy structures (2005)
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